Eurozone optimism returns as Italian crisis fades

Consumer spending is at a record high as well, moving above €1.4 trillion last year and continuing to gain since then. While the stock market is not the economy, as the saying goes, if consumers continue to increase their spending there is hope for further economic growth, which should support valuations:

Many have pointed to the recent downturn in data such as gross domestic product (GDP) and purchasing managers indexes (PMIs), as if the eurozone is on the cusp of a major recession. A quick look at the composite PMI from Eurostat should calm their fears. Yes, it has fallen back from a January peak, but it is still firmly in expansion territory, and has been for four years now:

What has begun to change is the positioning in the euro. Net long positions in the currency had reached record levels in January. The downturn in data has seen some traders reduce their exposure to the euro, selling their holdings. More could follow if data fails to recover in a meaningful fashion, and if the European Central Bank (ECB) fails to hint at a hawkish shift in policy. This could be an earlier end to quantitative easing (QE) than expected, or a possible earlier than forecast increase in interest rates. A falling currency helps to boost the attractiveness of stocks, reversing the 2017 situation, when a rising euro meant that European stocks lagged far behind their American counterparts.

Despite its underperformance against the US over the past year, the DAX index remains a popular market with IG clients. It hit near twelve-month lows at the beginning of January, but a staunch defence of the 11,700 area over the February-April period allowed the market to find a bottom. A rally to 13,000 and higher followed, and while it then retraced sharply to 12,500 thanks to the Italian worries mentioned above, it created a new higher low and maintained the bullish outlook. The next step for the bulls is to retake 13,000, then post a daily close above the May high of 13,208, allowing the index to target the all-time high at 13,601.